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The recent note ban of high value notes may result in reduction of anywhere between 0.25-0.5 percentage points in real GDP growth in 2016-17, the latest Economic Survey has estimated.
This range is relative to the baseline estimate of real GDP growth of 7 per cent for 2016-17, it added.
This is significant as it is the first time that the Finance Ministry has assessed the demonetisation effect on GDP growth.
The Economic Survey -- annual flagship document of the Finance Ministry-- has preferred to give a range for the impact of demonetisation on growth.
A back of the envelope calculation shows that the Survey sees real GDP growth for 2016-17 ranging between 6.5-6.75 per cent, post demonetisation.
It may be recalled that the Central Statistics Office — which had recently come out with its advance estimate of 7.1 per cent for 2016-17-- had not factored in the demonetisation impact.
On a nominal GDP basis, the Economic Survey has provided a 0.25-1 percentage point reduction in nominal GDP growth relative to the baseline of 11.25 per cent.
“Over the medium term, the implementation of the GST, follow-up to demonetisation, and enacting other structural reforms should take the economy towards its potential real GDP growth of 8 per cent to 10 per cent,” the Survey said.
According to the Survey, the most appropriate gauge of demonetisation would be to compare actual nominal GDP growth –or the Survey’s estimate of it — with the counterfactual nominal GDP growth without demonetisation.
According to the CSO, this counterfactual is 11.9 per cent, while the Survey’s estimate is 11.4 per cent (best estimate of growth in the absence of demonetisation).
Interestingly, the Centre had in Budget 2016-17 factored in nominal GDP growth of 11 per cent for the current fiscal.
Suvey's approach
To estimate demonetisation effect, the Economic Survey has said that one needed to start with the “counterfactual”.
The Economic Survey’s best estimate of growth in the absence of demonetisation is 11.25 per cent in nominal terms (slightly higher than the last year’s Survey forecast because of the faster rebound in WPI inflation, but lower than the CSO’s advance estimate of 11.9 per cent) and 7 per cent in real terms (in line with both projections).
To assess growth after demonetisation, a simple model relating money to GDP has been employed. Then, making assumptions about the use of cash in the economy and the magnitude of the shift towards digital payments, the impact on nominal and real GDP growth for 2016-17 has been computed, the Survey said.
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